The market’s focus will momentarily return to economics again with the monthly US employment data taking centre stage later. This comes after an eventful week in the political sphere concerning mainly Italy and Spain, while trade war concerns came back to the forefront after the US government’s decision to lift steel and aluminium tariffs exemptions on the EU, Mexico and Canada prompted angry response and retaliation in these regions.
But at 13:30 BST or 08:30 EDT, all the market will care about will be the monthly employment data. The US Department of Labor will report on the number of jobs added to the US economy in May, the unemployment rate, and key wage growth figures. Recently, wage growth has taken on increased importance given market concerns about rising inflation. This has been reflecting in rising bond yields and a corresponding rally in the dollar which lifted the dollar index to its best level since November.
This week however, the dollar has eased back along with yields as the safe haven appeal of US government debt led to increased flows into bonds. That being said, US benchmark yields were on the rise again as this report was being written, in part because of news a coalition government had been finally agreed in Italy, ending months of uncertainty in the EU's fourth largest economy.
The dollar’s slight weakness of late is partially also because of profit taking after a strong rally. Meanwhile improvement in Eurozone data – most notably CPI inflation, which surged to 1.9% year-over-year in May from 1.2% previously – also helped to fuel a rally in the EUR/USD exchange rate, while safe haven flows in the yen undermined the USD/JPY.
Current NFP Expectations
The consensus expectations for Friday’s headline non-farm payrolls data point to around 190,000 jobs added in May, after April’s disappointing 164,000 print. The May unemployment rate is expected to have remained unchanged at 3.9 percent. In terms of wage growth, average hourly earnings are expected to have increased by 0.2% after last month’s lower-than-expected 0.1% increase.
Jobs Data Preceding NFP
Key employment-related releases preceding Friday’s official jobs data have shown a mixed employment picture. The ADP private employment report came out slightly weaker than expected at 178,000 private jobs added in April against a prior forecast of around 191,000. The slightly disappointing ADP print didn’t lead to an immediate sell-off in the dollar, though the greenback has remained downbeat against the likes of the euro and pound. It should also be kept in mind that the ADP report is typically not a very accurate pre-indicator of the official NFP jobs data from the US Labor Department, and sometimes even misses the mark dramatically.
Unfortunately, the ADP has been the only major pre-NFP indicator at our disposal for this month. That’s because the ISM manufacturing and non-manufacturing (services) PMIs have not yet been released, so we don’t have any indications about the latest employment changes in these sectors. Meanwhile the weekly jobless claims that have come out throughout the month of May have been more or less in-line with the expectations, and have remained near historic lows.
Forecast and Potential USD Reaction
With the limited number of indicators, our target range for the NFP for this month has been mainly derived from the recent trend in the jobs market and the not-so-accurate ADP report. But we must remember that the poor weather in March and April may have affected employment in those months. Thus jobs growth may have rebounded in May.
With the consensus expectations of around 190,000 jobs added in May, our target falls in the range of 175,000-200,000, given the above considerations. Though the US dollar will likely be moved by a host of other fundamental factors, including continuing speculation on potential trade wars, any headline jobs outcome falling above this range should give the US dollar a boost to extend its recent rally. A result falling within the range will unlikely make much of a significant impact. And any reading that falls significantly below the range could result in a dollar pullback. Of course, the headline result, as previously noted, is not the only important data point. If wage growth figures surpass expectations, the dollar could see a more substantial boost on higher inflation and interest rate expectations.
NFP trade ideas
In the event the jobs and crucially wages beat expectations, then we would favour looking for bullish setups on the dollar against the Canadian or Mexican Peso with these currencies having been hit after the US imposition of tariffs on steel and aluminium imports.
But in the event that the data disappoints, then we would favour looking for bearish setups on the dollar against the likes of the Aussie, pound or the euro – the latter being supported by resolution of Italian election stalemate and after the releases of stronger inflation figures earlier this week.
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